Leveraged ETFs Look to Make a Comeback by Juicing AI, FANG Bets

Just when you thought leveraged exchange-traded products were dying off, the trend seems to be reviving. New vehicles that offer double or triple exposure to a trendy group of stocks are once again bubbling to the surface.

On Thursday, Direxion Funds, a firm specializing in leveraged funds, filed registration statements for three ETFs: the Direxion Daily Lithium Bull 2X Shares, Direxion Daily Robotics & Artificial Intelligence Bull 2X Shares and the Direxion Daily Preferred Stock Bull 2X Shares. Last week, REX Shares and Bank of Montreal started leveraged FANG ETNs, allowing investors to juice their bets on Facebook Inc, Apple Inc., Netflix Inc., Alphabet Inc. (Google) and five other "growth" stocks.

"With volatility so low, these new leveraged products may find an audience of bored traders who are looking for action in some hot area but are averse to cryptos," said Eric Balchunas, a Bloomberg Intelligence analyst.

From self-driving cars to stock-picking robots, artificial intelligence has quickly become a concept that investors have on their short list. Interest in lithium has also been soaring since its production could supply a future electric vehicle battery market. The Global X Lithium & Battery Tech ETF (ticker LIT) has seen a 620 percent growth in the fund’s total assets in the past year alone.

But just because something is a hit with an ETF doesn’t necessarily mean there is interest in a leveraged form of the strategy, hence the liquidation of Direxion’s HAKK, Balchunas said. Just last year, Direxion shut down two leveraged funds, a leveraged cybersecurity fund known by its ticker HAKK and a leveraged homebuilders ETF (ticker CLAW).

‘R’ Rating

Tell that to those new exchange-traded notes holding FANG stocks. The tech Goliaths reported earnings yesterday, and although the results were mixed, everyone wants a piece of the FANG -- or FAANG -- pie.

The BMO REX MicroSectors FANG+ Index 3X Leveraged ETN (ticker FNGU) and the BMO REX MicroSectors FANG+ Index -3X Inverse Leveraged ETN (ticker FNGD) are not cheap with a 95 basis-point expense ratio.

REX, the company behind the notes, appears to be targeting more professional, experienced traders, with a company press release calling the notes "hedging and trading vehicles." Still, that doesn’t mean retail investors won’t try to cash in.

"There are plenty of ways to lose money fast for retail investors outside leveraged products but these would get a hard ’R’ rating if they were movies," Balchunas said.

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